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As the November 23 deadline to the super committee’s debt-reduction plan approaches, it is unclear whether they can agree to the bare minimum of $1.2 trillion in deficit cuts.In the absence of a plan, the $1.2 trillion in cuts would begin automatically in 2013, affecting discretionary spending and Medicare, with defence losing $500 billion.
Societe Generale analyst Aneta Markowska points out the what could go wrong, if the super committee fails to meet the minimum target.
First, if this doesn’t get passed, some on the committee are attempting to find ways to block the automatic cuts to spending which President Obama and Republican House speaker John Boehner have said are unacceptable. Across the board cuts will drag on GDP and shave 0.5% off growth in 2013.
More significantly, it could have major ramifications on more stimulus in 2012. Markowska says:
“Stimulus is necessary, at the minimum to offset expiring provisions from the current year’s stimulus package. If we do not see the extension of the payroll tax cuts and the unemployment insurance benefits the drag to GDP could be in the rate of 1 to 1.5pp. Given our forecast for 1.4% in 2012, it means the US would likely fall into recession.”
Finally, Markowska says a failure to agree on a plan could cause S&P to downgrade U.S. credit rating though other ratings agencies are unlikely to make a similar move:
“We still assume that the committee will be able to agree on a bare minimum, i.e. $1.2tn of future deficit reduction phased in more gradually than the automatic cuts. This would reduce the drag on growth in 2013, but it would almost certainly not be enough to satisfy S&P. The credit rating agency warned that in the absence of a much larger deal, it would likely downgrade the US credit rating further before the end of the year.”
Unlike the debt ceiling debate, this time around, a failure to meet deadline won’t threaten default or a government shutdown.
Hopes of $3 trillion – $4 trillion in cuts over the next decade have been written off by now. Democrats on the super committee have tried to draft a stimulus plan as part of the deficit reduction negotiations. Some chatter suggests that Democrats wanted to use savings from the Iraq troop withdrawal to pay for the 2012 stimulus package. A suggestion unacceptable to Republicans.
The Congressional Budget Office will review the plan by Monday, which means the committee will have to agree on the plan over the weekend. The supercommittee needs a majority or seven votes for the plan to pass. After which Congressional leaders will have to convince their party members to vote in favour of the plan. The House and Senate need to vote on it before December 23, 2011.
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